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Colorado Court of Appeals Clarifies Covenant Enforcement

The Colorado Court of Appeals recently held that short-term residential rentals are not commercial use of property within the meaning of restrictive covenants prohibiting commercial use in a residential neighborhood.  Houston v. Wilson Mesa Ranch Homeowners Association, Inc., 2015 COA 113 (Aug. 13, 2015). This decision is likely to impact how homeowner associations word their restrictive covenants going forward.

The Houston case arose after the Wilson Mesa Ranch Homeowners Association discovered that homeowner David Houston was advertising and renting his single-family residence through Vacation Rentals by Owner (VRBO), an online vacation rental marketplace. The homeowners’ association board responded by amending the homeowners’ association covenants to prohibit owners from renting their property for less than thirty days without prior board approval, and imposing a $500 fine for each violation.  The board fined Mr. Houston for subsequent violations, and he then challenged the covenant amendment as unlawful. Commercial use of property was prohibited under the existing Wilson Mesa Ranch covenants, and the board argued the amendment simply clarified that existing provision. The trial court reviewed the covenants and concluded that short-term rentals were neither specifically addressed nor prohibited. Without prior Colorado case law holding short-term rentals to be commercial use of property, the court construed the ambiguous language of the covenants to favor the unrestricted use of property, and found in Mr. Houston’s favor.

On appeal, the Colorado Court of Appeals confirmed that Colorado follows the common law principle that, where ambiguous, restrictive covenants are construed in favor of the free use of property. The court also reviewed case law from other states reasoning that, so long as property is used for living purposes, it “does not cease being ‘residential’” (Houston at ¶18). While the board had the authority to enforce the covenants, it did not have the authority to enforce nonexistent provisions. Given those determinations, the Court of Appeals affirmed the trial court’s judgment in favor of Mr. Houston.

In light of Houston, it now appears that Colorado homeowner associations seeking to prohibit short-term rentals of property must explicitly address such rentals in their restrictive covenants.